Emerging Views®

The Increasing Movement Away from LIBOR and the Development of New Reference Rates

January 2018 - In a detailed speech HERE given on January 9, 2018 at the annual Primary Dealer Meeting in New York City, Lorie K. Logan, Senior Vice President of the Federal Reserve Bank of New York, discussed the movement away from the use of the LIBOR rate as a reference rate and the New York Fed’s role as a producer and administrator of new reference rates that are being developed as possible LIBOR substitutes.

Ms. Logan stated that because the long-term availability of LIBOR no longer is guaranteed, it is critical that market participants with exposure to the U.S. dollar LIBOR rate take steps to mitigate their exposure including, at a minimum: (1) adopting contract language that addresses the cessation of U.S. dollar LIBOR rate as a reference rate, and (2) reducing reliance on the U.S. dollar LIBOR rate by transitioning to robust alternative rates, such as the secured overnight financing rate discussed below.

Ms. Logan indicated that the New York Fed will produce three new Treasury repo rates, each designed to address the needs of different segments of the market:

• The tri-party general collateral rate or TGCR is intended as a measure of rates on overnight, tri-party Treasury general collateral repo transactions where the counterparties involved know each other’s identity at the time of the trade.

• The broad general collateral rate or BGCR is intended to capture all trades where the specific securities provided as collateral are not identified until after other terms of the trade are agreed.

• The secured overnight financing rate or SOFR is intended to be the broadest measure of the cost of borrowing overnight in the repo market using Treasury securities as collateral. SOFR is intended to reflect the general cost of borrowing cash overnight collateralized by Treasury securities, regardless of the motivation of the cash providers participating in the trades. Earlier in 2017 this rate was chosen by the Alternative Reference Rates Committee convened by the Federal Reserve as a possible alternative to the U.S. dollar LIBOR rate.

These new Treasury repo rates are anchored in active underlying markets, are based on a comprehensive set of transactions that incorporate controls to mitigate risk of errors and manipulation, and are capable of being published every day, even in adverse circumstances.

The New York Fed expects to begin producing and publishing these three rates daily starting in the second quarter of 2018. Ms. Logan noted that all three rates will be calculated as volume-weighted medians and that various measures will be taken to mitigate the risks associated with data collection for these rates.



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